Can your real estate investment compete with non-profit or government projects? Short answer is no.
Here is what you are up against: 1) Properties for low end housing that cost as much per square foot to build as high-end homes.
2) Brand new vs.
renovated.
3) Low rents 4) More services.
I left a meeting last week where a non-profit group was extolling the virtues of their new quasi-high-end mixed income community.
They spoke of the benefits to the community, such as reduced crime, less density, more services, rents that can be afforded by low-income and straight rent subsidy tenants.
The whole concept works assuming you can get the three types of residents in, those who are willing to pay market rents, those who are provided a rent subsidy, and those who's rent is paid directly by the state.
I can understand why it would be appealing to at least the rent subsidy and direct pay residents.
For the first time in their lives they are being afforded the opportunity to live in a brand new community, including granite counter tops, dishwashers, washer and dryers, community parks, and other facilities.
For me personally, I didn't have this available to me until I had put myself through college, a master's program, and getting a decent paying job working for a decent firm.
Not to mention paying all of my bills on time for the previous seven years to make sure my credit was good enough to qualify.
So, if I was offered this opportunity with only fair credit, no reliable job history and a handful of other personal issues, I am sure I would move out of my $500 a month unit and into this type of community I would jump all over it.
The question is where does that leave you, the professional real estate investor who has provided low income housing for your investment career? In a bind!! You have spent years building up your portfolio of properties, which you paid for with actually earned dollars and decent credit.
Based on the economics of the market, you have invested the right amount of money into the property based on what you are receiving in rents, which is probably pretty minimal.
However, that is okay because that is how the economy works.
You have a justified ROI that each of your investments must produce and it is market driven.
Well the government has decided to partner with non-profit groups to revamp the housing situation providing housing units that cost 3 times more than your unit to build and maintain because they don't have to concern themselves with whether or not the property is profitable.
As a matter of fact, they are built under the assumption the properties will be losers, but that is okay.
To make the situation better, the new units show how they have reduced crime because they screen out those with criminal backgrounds.
So, they have a backlog of applications, because they are providing middle class living arrangements for little or no cost.
They accept the cream of the crop, and reject the trouble makers.
So, clearly they crime rates will be better.
Now you the landlord are left with reduced rents and a higher than normal population of the real trouble makers to rent to.
So, in effect you will be left with more property abuse, reduced rents and lower property values.
All of the sudden it is not the big win-win for the community that they anticipated.
Landlords will reduce the capital expenditures for these properties fall to a level consistent with the economics, further putting downward pressure on your investment.
Eventually smart money moves out of these areas all together, thus the end result is you have displaced one low income, crime ridden area with another.
So, now back to square one, but wait you as an income earning tax payer now have to support this amenity rich community because, remember it was built with the anticipation that it would be a financial loser.
Moral of the story, we as a community of real estate investors do not need to support these types of projects.
They don't create jobs, and they are not a draw for businesses to move in.
These are primarily the ways to move a community forward, and these types of projects accomplish none of that.
The concept may make sense on paper, but all they are is a short-term band aid for a problem that can only be realistically fixed by a good city plan and capitalism.
Taking money out of your pocket to knowing fund a losing proposition should piss you off like it does me.
Taking money out of your pocket now to decrease the value of your portfolio over the long-term should get your blood boiling.
Can you make money in the real estate market right now? Absolutely!!! Can you make a lot? Yes.
Is your government making decisions, making you pay for these decisions and reducing your earnings potential? You better believe it.
Stay abreast of what is going on in your community.
Figure out who is pushing for these types of projects.
I will bet you are seeing a very one sided push.
Banks, contractors, etc.
are making a lot of money on these projects, because the government is anything but efficient.
We need to stand up and point out what these projects really are doing to our communities.
If only we had a free market lobbying group that was a loud as those groups that spend all their time getting these types of projects moved through.
Unfortunately we tend to be busy actually trying to make some money and grow our businesses!! Keep your eyes open, make good investments, and eventually it will become clear the free ride solution just doesn't work.
Don't be afraid to raise your voice to stand up against these types of projects.
Jake